If contracts cannot be fully specified Pareto optimal results may be closed off because individuals cannot rationally trust each other's promises. This paper assumes that human individuals can become internally committed not to act opportunistically and that others can detect to a certain extent whether they are dealing with an uncommitted (untrustworthy) or a committed (trustworthy) partner. Adopting an `indirect evolutionary approach' we show that co-operative commitments can survive in evolutionary competition even if conventional mechanisms like repetition, reputation, contract or (...) promising are lacking. If detection of uncommitted individuals is neither too costly nor too unreliable there will in general be a `niche' for both committed and uncommitted actors even in one off large numbers' interactions. (shrink)

This paper attempts to identify behavioral patterns and compare their average success considering several criteria of bounded rationality. Experimentally observed choice behavior in various decision tasks is used to assess heterogeneity in how individual participants respond to 15 randomly ordered portfolio choices, each of which is experienced twice. Treatments differ in granting probability information and in eliciting aspirations. Since in our setting neither other regarding concerns nor risk attitude matter and probability of the binary chance move is choice irrelevant, categorizing (...) decision types relies on parameter dependence and choice adaptations. We find that most participants reduce systematically sub-optimality when following the identified criteria. (shrink)

We study ultimatum and dictator variants of the generosity game. In this game, the first mover chooses the amount of money to be distributed between the players within a given interval, knowing that her own share is fixed. Thus, the first mover is not confronted with the typical trade-off between her own and the other’s payoff. For each variant of the game, we study three treatments that vary the range of potential pie sizes so as to assess the influence of (...) these changes on the first movers’ generosity. We find that removing the trade-off inspires significant generosity, which is not always affected by the second mover’s veto power. Moreover, the manipulation of the choice set indicates that choices are influenced by the available alternatives. (shrink)

From an institutional perspective we contribute to corporate governance of firms by (1) proposing a procedurally fair mechanism that is ethically desirable, and (2) experimentally testing whether procedural fairness crowds-in ethical behavior of managers (on behalf of shareholders) and workers. The experiment sees one ‘manager’ and three ‘workers’ (possibly representing three sections of the firm) co-determining an efficiency-enhancing investment which could harm some workers. Firstly, the manager claims a share of the investment surplus, then workers ‘bid’ for the investment to (...) express their willingness to satisfy the manager’s claim in case the investment is implemented. If the sum of workers’ bids is less than the manager’s claim, the investment is not implementable, which means its surplus will be lost. Workers’ behavior is ‘ethical’ when they veto unfair managerial claims, because the workers have to sacrifice own earnings. Hence, a manager’s fair claim is the ethical response to the threat of workers’ veto. If the manager claims fairly, workers’ ethical behavior is to ‘truthfully’ bid their investment evaluations; by all doing so, they equally share whatever surplus the manager has left for them. The experimental results show ethical behavior of managers in the form of fair claims. Despite these fair claims, workers behave less ethically by strategically underbidding. So the procedurally fair mechanism only partially crowds-in ethical behavior. This study should interest theorists of stakeholder management, especially those engaged in designing the rules of corporate governance. (shrink)

Lying for a strategic advantage is to be expected in commercial interactions. But would this be more or less obvious when lying could come from either party and question mutually profitable exchange? To explore this, we modify the acquiring-a-company game by letting both, buyer and seller, be privately informed. Specifically, the value of the company for the buyer is known only by the seller; whereas, only the buyer is aware by which proportion the sellers evaluation is lower than that of (...) the buyer. Before bargaining, both parties can reveal what they know via cheap-talk numerical messages. Game theoretically, the pooling equilibrium may or may not allow for trade depending on the commonly known expected evaluation discrepancy. By mutually revealing what one knows, one could boost trade and efficiency. Although strategic misreporting prevails quite generally, it is higher for sellers throughout the experiment. Regarding gender, women misreport less, especially as sellers, and offer higher prices. (shrink)

The paper presents a set of games of competition between two or three players in which reward is jointly determined by a stochastic biased mechanism and players’ choices. More specifically, a resource can be found with unequal probabilities in one of two locations. The first agent is rewarded only if it finds the resource and avoids being found by the next agent in line; the latter is rewarded only if it finds the former. Five benchmarks, based on different psychological and (...) game-theoretic assumptions are derived and their predictions compared to actual behavior of 120, 40, and 48 participants playing repeatedly. Of the five benchmarks—the unique (Nash) equilibrium, reinforcement learning, trust-based efficiency, maximum unpredictability, and regret-based (Impulse Balance) equilibrium—regret for missed opportunities best accounts for the qualitative aspect of participants’ behavior and regret attenuated by randomization best accounts for the quantitative aspect of behavior. (shrink)

Whereas early threats are chosen before bargaining, late threats are determined after bargaining ended in conflict. Instead of exogenously imposing the timing of threats, these are derived endogenously as in indirect evolution or endogenous timing. Based on a duopoly market, we first derive the equilibrium for all possible constellations regarding the timing of threats. Our analysis surprisingly justifies the early timing of threats as suggested by Nash (1953).

This paper attempts to empirically assess how advice may reduce suboptimality in a portfolio choice experiment with risk-neutral participants induced via binary-lottery incentives. Previous studies with a larger set of choice tasks report overwhelming evidence of suboptimality and how it is slightly reduced by learning and experience. Participants confront 15 randomly ordered portfolio choices, which they experience again in 2 successive phases. Intermediate advice between phases alerts participants that less-risky investments can improve the outcome for at least one chance event (...) without harming their success chances in the other random event. Compared to the pure choice treatment, another cognitively more demanding treatment additionally asks participants to form event-specific success aspirations that allow us to test satisficing and its optimality. The results show that intermediate advice increases the share of satisficing but not of optimal behavior beyond learning through experience. However, it significantly lowers the average distance from optimality. (shrink)

In experimental economics one can confront a “don’t!”, as in “do not deceive your participants!”, as well as a “do!”, as in “incentivize choice making!”. Neither exists in experimental psychology. Further controversies exist in data collection methods, e.g., play strategy (vector) method in game experiments, and how to guarantee external and internal validity by describing experimental scenarios by field-related vignettes or by abstract, often formal, rules as it is used in decision and game theory. We emphasize that differences between the (...) experimental methodology of the two disciplines are minor rather than substantial and suggest that such differences should be resolved, as much as possible, through empirical research. Rather than focusing on familiar debates, we suggest to substitute the revealed-motive approach in experimental economics by designs whose data not only inform about choice, but also about the reasoning dynamics. (shrink)

Applying an evolutionary framework, we investigate how a reputation mechanism and a buyer insurance (as used on Internet market platforms such as eBay) interact to promote trustworthiness and trust in markets with moral hazard problems. Our analysis suggests that the costs involved in giving reliable feedback determine the gains from trade that can be obtained in equilibrium. Buyer insurance, on the other hand, can affect the trading dynamics and equilibrium selection. We find that, under reasonable conditions, buyer insurance crowds out (...) trust, and trustworthiness. (shrink)

Different evaluators typically disagree how to rank different candidates due to their idiosyncratic concerns for the various qualities of the candidates. Our ranking mechanism asks all evaluators to submit individual bids assigning a monetary amount for each possible rank order. The rules specify for all possible vectors of such individual bids the collectively binding rank order of candidates and the payments, due to the different evaluators. Three requirements uniquely determine procedurally fair ranking rules as a game form. Only when additionally (...) assuming exogenously given true evaluations of collective rankings, which may be commonly or only privately known, and—in case of private information—beliefs concerning the evaluations by others, this game form determines proper games and allows for equilibrium analysis. After an illustration, the approach is adjusted to situations where one wants to rank only acceptable sets of candidates thus rendering the mechanism even more attractive. (shrink)

The implementation of a new kidney allocation algorithm by Eurotransplant was a ‘rule choice’ with serious ethical, legal, and political implications. Eurotransplant made that choice in view of a careful analysis of empirically predictable consequences of alternative rule specifications. This paper studies in a stylized way how the decision on the allocation algorithm emerged. Hopefully an understanding of central features of the described successful case of initiating improvements may be helpful in other cases with a similar structure.

Consistency and optimality together with converse consistency provide an illuminating and novel characterization of the equilibrium concept (Peleg and Tijs, 1996). But (together with non-emptiness) they preclude refinements of the equilibrium notion and selection of a unique equilibrium (Norde et al., 1996). We suggest two escape routes: By generalizing the concept of strict equilibrium we question the practical relevance of the existence requirement for refinements. To allow for equilibrium selection we suggest more complex reduced games which capture the inclinations of (...) ``players who already left''. (shrink)

Simple game experiments of the reward allocation, dictator and ultimatum type are used to demonstrate that true explanations of social phenomena cannot conceivably be derived in terms of the perfect rationality concept underlying neo-classical economics. We explore in some depth, if speculatively, how experimental game theory might bring us closer to a new synthesis or at least the nucleus of a general theory of ‘games and boundedly rational economic behavior’ with enhanced explanatory power.

The main results of our indirect evolutionary approach to trust in large interactions suggest that trustworthiness must be detectable if good conduct in trust-relationships is to survive. According to theoretical reasoning there is a niche then for an organization offering a (possibly) costly service of keeping track of the conduct of participants on the net. We compare traits of an organizational design as suggested by economic reasoning with those that actually emerged and ask whether institutions like eBay will increasingly have (...) to ‘economize on virtue’ although so far they could rely on its spontaneous provision. (shrink)

When randomly assigning participants to experimental roles and the according payment prospects, participants seem to receive “manna from heaven.” In our view, this seriously questions the validity of laboratory findings. We depart from this by auctioning off player roles via the incentive compatible random price mechanism thus avoiding the selection effect of competitive second price auctions. Our experiment employs the generosity game where the proposer chooses the size of the pie, facing an exogenously given own agreement payoff, and the responder (...) is the residual claimant. We find that entitlement crowds out equality seeking and strengthens efficiency seeking. More generally, we find that inducing entitlement for the roles in which participants find themselves makes a difference. Interpreting participants’ willingness to pay for their role as their aspiration level further allows to test satisficing and explore “mutual satisficing.” We find that responder participants apparently do not anticipate proposer generosity in aspiration formation. (shrink)